When it comes to business taxes, do you really need to issue a 1099-MISC to your contractors?
Even though it's March, and I've already filed my tax return, I'm still receiving 1099s from some of my clients. As I look through the papers, I am struck by the fact that many of my clients are issuing these forms even though they don't need to because I've been paid through PayPal.
If you're still working on your business taxes, or if you are making plans for the future, it is important to understand that there is a chance that you might not need to issue a 1099-MISC. If you are paying your contractors through PayPal, or some other third party payment processor, there is no need to issue a 1099.
PayPal 1099-K Reporting
A few years ago, the IRS introduced a new form and reporting requirement for third party payment processors. When is someone completes at least 200 transactions and makes at least $20,000, the third party is required to report to the IRS and send a 1099-K form.?For many preparing business taxes, this is likely to come in the form of the PayPal 1099-K.
If you are a business owner, this means that you may not have to issue a 1099 to your contractors if you have been using a third party, especially PayPal. My own accountant, Eric Nisall of AccountLancer, points out that even if the contractor doesn't meet the threshold requirements, there is no need for you to issue the 1099-MISC. Even if your contractor doesn't receive a 1099, he or she is still expected to report all of his or her income. It's not your responsibility if you use a third-party payment processor?like PayPal.
Duplicate Reporting
If you issue a 1099-MISC to your contractors and you pay them through PayPal, you could wind up causing them more trouble. If you report a 1099 into the IRS and they also receive a PayPal 1099-K, that income is double reported. This has been happening to me for several years. To the IRS, it looks like I make more than I do. I have to reconcile my PayPal income as make sure I can cross reference with the rest of my income recorded on 1099-MISC forms. In some cases, the IRS will come back and tell you that you owe more money based on this double reported income.
Business Taxes Made a Little Easier
As a business owner, the new rules about reporting can actually be better for you. If you are paying through PayPal or a similar third-party processor, you don't have to do as much paperwork. You don't need to issue 1099s to your contractors or file them with the IRS. This can save you time and money when it comes to administrative work.
Unfortunately, there still isn't a lot of information out there teaching business owners now how to handle the reporting requirements that come with the new 1099-K. As a result, people prepare their business taxes as they have for many years. This is a hard habit to break, but it's important to move beyond the old requirements and understand there are different expectations.
You'll save time and money as a business owner, and your contractors won't be annoyed by fighting with the IRS over income that you double-reported.
There is so much confusion on this topic, so I’m glad you are clearing it up in this post.
It’s killing me as far as my clients are concerned. So much double-reported income!